The Palestine Exchange (PEX), which makes a market for shares in 46
local companies with a combined market capitalization of $2.9
billion, is on its way to becoming a publicly traded stock itself.

Shares in the PEX will begin trading on the Ramallah-based exchange
April 4, the 15th anniversary of its founding, after Palestine
Development & Investment Company, PEX’s biggest shareholder, has sold
the first of a planned two million shares. When all the shares are
sold, a process that could take up to a year, the public will hold
about 20% of the exchange.

The initial public offering (IPO) comes at a tough time for the PEX
and the other stock exchanges of the Middle East and North Africa,
which have seen prices and volume decline in the face of the global
financial crisis followed by the political turmoil of the Arab Spring.

But Ahmad Aweidah, PEX’s chief executive officer, told The Media Line
that the Palestinian bourse had weathered the crises relatively well
and that investors in the IPO stood good upside prospects that would
be leveraged by new revenue streams that the exchange is developing.

“You’re coming into the exchange when it’s at bottom of the cycle, so
the only way is up from here on,” Aweidah said. “In spite of the
decline in trading revenue in the last three years, we are not making
huge losses. We’ve grown other revenue sources aside from trading and
we’ve managed to keep expenses more or less stable in the last three
years.”

Last year, the only two Arab stock markets to show a positive return
were Iraq (starting from a very low base) and Qatar (enjoying booming
natural gas exports). PEX’s benchmark Al-Quds index fell 2.6%, but
that made it the region’s third-best performer. Most markets recorded
double-digit percentage drops, with Cairo and Damascus plunging close
to 50% as political upheavals wreaked havoc on their economies.

The market environment has improved somewhat in 2012. Trading volume
on the PEX grew to a monthly average of 16 million shares in January
and February, up from an average of 15.4 million all of last year.
The Al-Quds index is up about 1.5% so far this year, although it is
lagging behind many of the region’s markets that have rallied in 2012.

“I would say I am cautiously optimistic,” Aweidah said. “We’ve seen a
slight turnaround in regional markets, but I believe 2012 will be
overshadowed by the Arab Spring and here by the financial crisis of
the Palestinian Authority.”

Donor aid for the PA’s current and development budgets last year fell
$500 million short of the $1 billion the PA had expected, according
to an International Monetary Fund (IMF) report. That reverberated
through the economy as the PA delayed paying suppliers and borrowed
heavily from local banks. Unless donor countries come through with
more aid, the PA’s fiscal situation looks no better for this year,
the IMF said.

Meanwhile, the IMF estimates that GDP growth slowed to 5.7% last
year, a relatively high rate by global standards but by far less than
the 9% rate the economy was enjoying in 2008 through 2010.

The slowdown in trading has hit the PEX’s bottom line. Since a
stellar year in 2005, when the exchange posted net income of $8.7
million on gross revenue of $11.8 million, the numbers have been in
decline. PEX slipped into losses in 2010 and 2011, although Aweidah
emphasized that the profits from the years prior exceeded the
combined losses by 20-fold.

The exchange is, nevertheless, determined to go ahead with the IPO.
It was converted into a public shareholding company in 2010 and by
law must list its shares and increase its public shareholding. But
the listing will also be good for the exchange and its operations,
Aweidah said.

“We did it mainly to increase transparency and credibility, and
enlarge the shareholder base,” he said. He said he hopes the example
would rub off on the Palestinian corporate sector as “a model for
other public shareholding companies.”

Although publicly traded stock exchanges are common elsewhere in the
world – such as NYSE Euronext, which owns the New York Stock
Exchange, and the London Stock Exchange Group, which owns the LSE and
Borsa Italiana – the PEX will be only the second Arab bourse to list
its shares after the Dubai Financial market. But Dubai is 80% owned
by the government while PEX is entirely in private hands.

The PEX aims to expand and diversify its revenue, half of which came
from trading last year. It is developing its post-trading services
and taking over clearing and settlement from the central bank, said
Aweidah. It has begun charging for financial data and plans to offer
network-hosting services for a fee to exchange members, he added.

Trading activity may also get a boost if the PEX succeeds in winning
frontier market status from MSCI, the global stock market
benchmarking company. Last year, just over a third of the trading was
done by foreign investors and that would likely rise if MSCI gives it
the upgrade because fund managers typically weigh their country
holdings according to the MSCI weighting.